The Development of Trade

Pick up any item in a department store, whether it be a stuffed toy, a DVD player, or a fashion item, and check the Made in tag. The likelihood that it was manufactured in your country is slim. The chances are that the item was manufactured in China or assembled in Brazil. Even the food in your supermarket, whether fresh or prepackaged, may very well have been imported from another country.

We all know that international trade has been in vogue for centuries and most civilizations carried on trade with other parts of the world. This was necessary because the resources that communities needed either simply weren’t available or could be obtained more competitively from other places. Rarely has any one community been entirely self-sufficient and in the present context, where technology and innovation in every aspect of business life have encouraged globalization, no country can afford to be isolated.

International trade has a rich history that started as a barter system, which was replaced by mercantilism in the 16th and 17th centuries. The 18th century saw a shift toward trade liberalism that, by and large, continued until the outbreak of the First World War. It was in this period that Adam Smith, the father of economics, wrote his famous book, An Inquiry Into the Nature and Causes of the Wealth of Nations. This book, published in 1776, did not especially focus on the benefits of developing trade itself but on the need to continuously improve the productive powers of a country, or an organization. This, he believed, would lead to an indefinite increase in the production of things to be consumed by individuals, which he saw as being good for any nation’s economy. His vision came with a qualification however, which was that this would only be achieved in conjunction with a significant growth in local communities and the development of trade between them.

These thoughts were taken up about 40 years later by David Ricardo, perhaps the most influential economist of the time after Smith, who determined the relatively simple and coherent law of competitive advantage,2 which suggests that total output will be increased if people and nations engage in those activities for which their advantages over others are the largest, or their disadvantages are the smallest. This principle remains valid in the 21st century and continues to influence international trade to the extent that the evolution of business activities in any country is more often than not shaped by a form of natural selection. Yet, the political process tends to bend the laws of nature as the government policies of each country seek to develop or protect industries or organizations through either export subsidies or import duties: practices that are gradually being eradicated as a result of the activities of the WTO.

Political posturing of this nature, although there was plenty of a ­different kind, was not especially evident throughout the long second half of the 19th century when most Western nations were actively promoting trade liberalization by reducing customs duties and abolishing quantitative restrictions. This allowed the trade of goods and services to go on freely and encouraged the establishment of business activities wherever it seemed best, both of which led to full employment and an improving quality of life. The result was the achievement of a level of international trade that many of the world’s leading economies were not to experience again until the 1990s.3

Spectacular economic growth and the steady expansion of the global economy during this period led to an increase in the political aspirations of Empire. The resulting Great War changed the entire course of world trade as countries built walls around themselves with wartime controls. The effort put into dismantling wartime measures and getting international trade back to some sort of normality after the war was dramatically halted by the economic recession of 1920, which changed the balance of world trade once again. At this time, the rapid fluctuation in currency relationships, often resulting in devaluations, saw major changes in prosperity creating economic pressures that persuaded many countries to adopt protective mechanisms by raising, or reintroducing, duties, quotas, restrictions, and licensing, as well as introducing exchange controls to limit currency outflows.

The need to reverse this trend in protectionism and increase international trade between countries gave rise to the League of Nations–sponsored World Economic Conference in Geneva in May 1927. The attendees, from 29 nations, were neither delegates nor representatives of their respective countries but simply individuals who had gathered to determine what could be done to overcome the economic difficulties and conditions of the time. They engaged in a substantial dialogue that resulted in the development of a detailed and balanced multilateral trade agreement, which provided a prescription for the global economic ills they faced. Unfortunately, their work could only have practical consequences if it was translated into positive actions by their governments.

Regrettably, this agreement remained without practical effect due to the onset of the Great Depression in 1930. Throughout the ­ensuing decade, when economic activity initially fell dramatically (e.g., gross national product in the United States fell by 30% from 1930 to 1933), there was a global epidemic of protectionist measures. The planning of foreign trade, not just in communist societies but even in capitalist ones, came to be considered a normal function of the state. Mercantilist policies dominated the world scene until after the Second World War when trade agreements (the 1947 General Agreement on Tariffs and Trade) and supranational organizations (the 1957 Treaty of Rome that established the European Economic Community) became the chief means of managing and promoting international trade.

Today, the nature of international trade and the factors influencing global trade flows are much better understood. Global markets, which generally have their foundation in the natural resources that provide countries with a comparative competitive advantage, have been molded by many factors. These include the theories developed by economists—such as competitive advantage, and economies of scale—advances in technology both in terms of changes in product life cycles and methods of trade, as well as the structure of, and services provided by, the world’s financial markets.